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Ugly, Ugly Macro Chart... Running Japanese Investment Over By A Bus

When my teammate, Andrew Barber, brought up this data point in our morning meeting today, I said "pardon?"!

Toyota reported sales in Japan for the month of July today. For the 23rd consecutive month, the number of trucks & buses sold by Japan’s largest auto company in their home market declined on a percentage basis vs. the same month in the prior calendar year.

Ben Bernanke and Co. please look at this chart. This is what happens when economies are ran into the ground by Keynesian easy money bailout policy makers. No one wants to invest domestically/commercially, even though the money is free!

KM

BKC – Not Too Unlike its Competitors

BKC announced yesterday that it is adding menu items to its BK Value Menu. New items will include the Cheesy Bacon BK Wrapper and the Spicy Chicken BK Wrapper, which will be available for a suggested retail price of $1.39. Both items will also be offered as a Value Meal, which will include two wraps and will be priced at $3.99 for the Cheesy Bacon and $4.59 for the Spicy Chicken. BKC’s President of Global Strategy, Marketing and Innovation Russ Klein stated, “Unlike our competitors, Burger King Corp. is helping cash-strapped customers by adding to our BK(TM) Value Menu, not cutting back.” I found this statement kind of amusing because it seems like all of BKC’s QSR competitors have been adding more value items to their menus. And, they (BKC included) are doing so regardless of the impact on margins. Just last week, BKC reported that its 4Q08 U.S. and Canada restaurant margins (net of the reimaging program) declined 230 bps despite a 5.5% same-store sales lift.
  • NPD data point to a significant increase in the number of visits driven by deals within the QSR segment, particularly the hamburger segment (which includes BKC, MCD, WEN, etc), and based on recent menu introductions, we will continue to see the QSR segment chase less profitable traffic growth.
  • Other recently announced QSR promotions and added menu items at lower price points:

    Nation’s Restaurant News reported yesterday that 400 Wendy’s units in Florida will give away coupons for more than a million free Double Stack hamburgers on Labor Day. For reference, the Double Stack typically sells for $0.99 on the company’s value menu and is made with two hamburger patties, cheese, onions and pickles. At $0.99, this menu item is already cutting into margins, and now the company is giving them away for free!
  • Earlier this week, Jack in the Box introduced its Pita Snacks, a new product platform of snack-sized, wrap-style sandwiches, which will be offered at $1.99.

Industry Nuggets from BWS Conf Call

Several interesting call outs for the industry from Brown Shoe’s 2Q results and conference call.

• Though traffic was down 5.2%, and total comps down 2.9%, athletic comps were +1.3%.
• Nike, New Balance, Reebok and Puma all stand-outs.
• No mention of Skechers.
• Skate doing especially well.
• Fashion and juniors down.
• Will be shifting more inventory to Athletic
• California, Nevada, Arizona and Florida all the most troubling markets. Ironically, Dick’s and/or Sports Authority are adding stores in all of them.

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 78.64%

Eye On Two Americas...

Toxic levels of consumer confidence on Main Street remain. This is happening despite Wall Street's call to arms that we should "drill, drill, drill", bring down oil prices, and solve all problems inflation related in one fell swoop.

The US$ has recovered alongside the US stock market this month. Gas pump prices have fallen alongside oil's decline. But every week the ABC/Washington Post Consumer Confidence reading shows no dice. No change.

At a -50 weekly reading, all time lows remain reality in Main Street confidence. Two Americas remain as a result. Get used to Obama's attack dog Democrats reminding Wall Street of the same.
KM

Spain's Stagflation

Below is a chart putting a picture to Spain's ominous economic situation. This week Spain reported producer price inflation at a 24 year high of +10.2% year over year. As the Euro currency depreciates, European countries have an accelerating feature in imported inflation.

Why do global macro investors care about Spain's GDP? Well, for starters, it's still the 8th largest economy in the world. It's also one of the country's who levered up their balance sheet aggressively to the asset leverage cycle.

Stay tuned...
KM

(chart by Andrew Barber, Director, Research Edge LLC)

JCG: Where Have We Seen This Story Before?

History is repeating itself. Retailers that don’t respect the impact of macro trends in planning their businesses are destined for mediocrity – at best.

Here’s a lesson about what not to do in retail. 1) Get over confident in your brand and market positioning. 2) Allocate capital accordingly – including on expensive real estate. 3) Ignore the macro headwinds coming and the change in behavior likely to be seen as competitors get increasingly desperate. 4) When comp plans start to miss, jam more product into the stores to drive revenue.

This, unfortunately, is J Crew. It was Gap as well (both Mickey Drexler). Not to unfairly single him out – this has been the case for many a retailer that doesn’t do macro analysis in planning their respective businesses.

Where does this leave JCG now? In a bad bad spot. Take the quarter, for example. Comps were flattish, and 10% revenue growth was almost entirely driven by square footage. Revenue is trending down steadily on a 1, 2 and 3-year run rate. Gross margins, however, took a sharp dog leg down – the greatest since 2004. When this happens, we should expect inventories to end clean, right? Not with JCG. Even with margins down meaningfully, inventory was up 25% at quarter end.

This is when our sales/inventory/margin map tells a frightening story. Check it out below. One might think that any move from where it is today is a positive one (i.e., things can only get better, right?). Not true. It is possible for JCG to own that lower left quadrant for several more quarters to come. Management’s current guidance does not suggest that this is the plan.
This is the worst place for JCG to be. History shows us that a position in this quadrant is usually not only a 1quarter rental.

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