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DKS: C-Level Shifts

The announcement of Dick’s Chief Marketing Officer Jeff Hennion’s departure in conjunction with other moves at C-level and board positions over the last 12-months caught our attention today. Upon further digging through various moves in the company’s senior ranks over the last year, the bottom-line is that there’s been a noteworthy level of turnover.  In fact, 50% of C-level management (3 of 6 positions) and 20% of the company’s Board of Directors have vacated their posts in the past year. When looked at in aggregate, the sheer volume of leadership change is certainly noteworthy.

 

We’d be remiss not to recall the fact that Gwen Manto (previously Dick’s Chief Merchandising Officer) left to join Sports Authority. Is it possible Mr. Hennion has also embarked on the same path? The thought certainly crossed our mind – though just to be clear, we don’t have intimate knowledge of the situation. In November 2009, TSA beefed up its team with the hiring of Jeff Schumacher as the Chief Marketing & Strategic Officer out of McKinsey & Co. While it may just be a simple case of timing, the chronology of executive moves at the two sporting goods giants suggests a shift in talent is underway. With Sports Authority’s intentions of bringing the company public in the near-term, we wonder just how many former DKS executives will be rubbing elbows at the road show.

 

DKS: C-Level Shifts - DKS MgmtChgs 10 1 10

 

DKS: C-Level Shifts - DKS MgmtChgs Table 10 1 10

 

Casey Flavin

Director

 


BWLD: SHORT TERM LOOKS GOOD BUT LONG TERM ISSUES MAKE IT A TRADE

Conclusion: The Street is mixed on BWLD, but the consensus EPS expectations seem low.  I am currently modeling FY10 EPS of $2.14 versus the street at $2.08 with more of the upside falling in 4Q10.

 

I estimate EPS for 3Q10E and 4Q10E of $0.45 (versus the Street at $0.43) and $0.60 (versus the street at $0.56) respectively.  The primary risk to my 4Q estimate is the ability of the industry to maintain the current trend of posting improved comparable-store sales results on a two-year average basis.

 

Reasons for upside:

 

Company comparable-store sales were up 2.2% in July versus +1.2% in the year-ago period, which implies a 30 bp improvement in two-year average trends since the end of 2Q10 (and trends came in much better-than-expected during 2Q10 after turning positive in June from -3.7% in April).

 

While this data point for July is encouraging, it obviously does not make a quarter.  Industry trends, on average, have improved on a one and two-year basis since early in the summer.  Comparisons become easier for BWLD for the remainder of the quarter as 3Q09 comparable-store sales came in at +0.8% (after being up 1.2% in the first four weeks of the quarter). 

 

I am modeling +3.0% company SSS for 3Q10, which implies a nearly 60 bp acceleration in 2-year average trends from the prior quarter.

 

The consensus says: The chart below shows the current sentiment surrounding the stock.  Positive ratings (“BUY” and “OUTPERFORM”) are at 55.6%, down from the peak of 63.2% in March, and up from the low of 44.4% in May.

 

BWLD: SHORT TERM LOOKS GOOD BUT LONG TERM ISSUES MAKE IT A TRADE - bwld ratings

 

COGS: Chicken wing prices were down nearly 11% in 2Q10.  Based on two-month number given for 3Q10 of $1.41/lb, wing costs will be down closer to 16% in 3Q10 versus the $1.67/lb cost in 3Q09.  The year-over-year benefit should be even greater in 4Q10 as the company is lapping its highest price paid in 4Q09 of $1.78/lb.  This, combined with same-store sales trends that should improve on a 2-year average basis, should drive the bulk of the year-over-year restaurant-level margin growth in 2H10.

 

Labor: Management guided to slight year-over-year leverage in 3Q10.

 

Offsets: Restaurant operating expenses are moving higher in 2H10 due to additional pay-per-view TV programming costs and an expected 11% increase in media spending in 3Q and 4Q.

 

Preopening expenses will be higher year-over-year as the company is expected to open 13 units in 3Q10 versus 5 in 3Q09 and 14 units in 4Q10 versus 12 in 4Q09.

 

3Q10 EPS Growth:

Although management guided to 20% EPS growth for the full year, they said on the last earnings call that it may not achieve that target in each quarter of the year and they mentioned the expected higher level of preopening expense in 3Q10. 

 

This, along with the fact that the company is lapping its highest quarter of YOY growth from FY09, leads me to think that the company will post its lowest year-over-year growth in 3Q10.  My 3Q10 EPS estimate assumes nearly 20% EPS growth after 23% and 31% growth in 1Q and 2Q, respectively.

 

I think the 49% reported EPS growth in 3Q09 relative to the 24% full-year growth was partly a function of comparisons.  The company’s 3Q08 EPS grew only 6% versus 24% for FY08 overall.

 

SSS actually slowed sharply in 3Q09 on a one-year and two-year basis and chicken wing prices were up 43% during the quarter.

 

Preopening expenses, however, were much lower YOY in 3Q09 and drove a bulk of the EPS growth as the company only opened 5 units in 3Q09 relative to 18 in 3Q08.  If you make 3Q09 preopening expense equal to the 3Q08 level, EPS would have only been up closer to 20%.

 

BWLD: SHORT TERM LOOKS GOOD BUT LONG TERM ISSUES MAKE IT A TRADE - bwld sigma

 

Summary:

Based on our restaurant sigma chart, it looks as though the company has a good chance of remaining in the “Nirvana” quadrant (positive same-store sales growth and positive restaurant-level margin growth) for the next several quarters if comp trends hold steady (that is obviously a big if).  BWLD needs positive comp growth to offset the growth-related costs inherent in its P&L and comps trends definitely improved more than I was expecting during the second quarter.  It will be important to see if BWLD can maintain this top-line momentum.

 

Longer-term thesis:

I continue to think the company is growing too fast.  I consider return on incremental invested capital to be the best metric to look at when considering the sustainability of a company’s unit growth plans.  After declining in 2009, returns look to be recovering in 2010 to about 30%, which is impressive.  Based on my current estimates (I think it will be harder for the company to achieve 20% EPS growth in FY11), I would expect returns, however, to fall off again in 2011 to a low double-digit range.  Although this still implies positive returns for 2011, I have found that the absolute direction of the trend in returns is the more important indicator of future trends and, ultimately, stock performance.

 

Howard Penney

Managing Director


FRIDAY MACRO MIXER - INCOME, ISM & SENTIMENT

Conclusion: We continue to see weakness in the consumption trends when government spending is stripped away.  Slower growth is likely going forward.

 

Commerce Department figures released today show that consumer spending rose in August while ISM and consumer confidence data have flashed to the downside in recent releases.  See our conclusions below and a chart of ISM component shifts in the most recent months.

 

INCOME - Consumer spending in the U.S. rose 0.4% in August; the gain exceeded the 0.3% increase projected the Bloomberg consensus.   Incomes were up 0.5%, the biggest advance this year (propelled by the incorrigible hand of Washington).  Transfer payments jumped 1.6%, indicating that the government’s crutch is still a core factor in this “recovery”. 

 

Hedgeye conclusion: there will be a rocky road transitioning from the government supporting consumer spending to the “real” economy.

 

 

ISM - The ISM print was better that feared, still growing in September, but at the slowest pace in 10 months.  The I SM factory index dropped to 54.4 from 56.3 in August.  Bloomberg consensus forecast a decline to 54.5.

 

Hedgeye conclusion: A sequentially lower ISM print in October is likely.

 

 

CONFIDENCE - The University of Michigan final index of consumer sentiment fell to 68.2 from 68.9 in August, but up significantly from the preliminary reading of 66.6 issued last month. 

 

Hedgeye conclusion: Maybe there was a fat finger in Michigan!  The bottom line is that confidence is not improving, but people are spending more thanks to gifts from Washington. 

 

Howard Penney

Managing Director

 

FRIDAY MACRO MIXER - INCOME, ISM & SENTIMENT - ISM COMPONENTS



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CHART OF THE DAY: Deflation?

 

POSITION  

Long Treasury Inflation Protection (TIP)

Short US Dollar (UUP)

 

 

CHART OF THE DAY: Deflation? - chart1

 

 

Assuming that the man saw this morning’s inflationary spike in the PRICES PAID component of the ISM survey (70.5 SEP vs. 61.5 AUG), we’re quite sure about what Ben Bernanke is doing right now – hoping you don’t see what markets do.
 
As we like to say at Hedgeye, hope is not an investment process.

Look at the two red arrows in this chart:
 
1.      SEPTEMBER 2007

2.      SEPTEMBER 2010

Heli-Ben didn’t recognize the inflection point in 2007, so we don’t expect him to publically consider the risk management questions now… but what if this debauchery of the US Dollar continues to put upward price pressure on everything priced in dollars?
 
Don’t forget that the question mark in this chart is the risk – and the risk remains NOT that inflation is born out of currency debasement, but that the mother-load of all inflations (the dotted red line) is actually in play.
 
We’re quite certain that consensus expects “deflation”, because that’s what the Fed needs to see. What you need isn’t always what you get. Ask 1970’s Fed Head, Arthur Burns, about that.


KM


Deflation? Chart Of The Day

POSITION: Long Treasury Inflation Protection (TIP), Short US Dollar (UUP)

 

Assuming that the man saw this morning’s inflationary spike in the PRICES PAID component of the ISM survey (70.5 SEP vs. 61.5 AUG), we’re quite sure about what Ben Bernanke is doing right now – hoping you don’t see what markets do.

 

As we like to say at Hedgeye, hope is not an investment process.

 

Look at the two red arrows in this chart: 

  1. SEPTEMBER 2007
  2. SEPTEMBER 2010 

Heli-Ben didn’t recognize the inflection point in 2007, so we don’t expect him to publically consider the risk management questions now… but what if this debauchery of the US Dollar continues to put upward price pressure on everything priced in dollars?

 

Don’t forget that the question mark in this chart is the risk – and the risk remains NOT that inflation is born out of currency debasement, but that the mother-load of all inflations (the dotted red line) is actually in play.

 

We’re quite certain that consensus expects “deflation”, because that’s what the Fed needs to see. What you need isn’t always what you get. Ask 1970’s Fed Head, Arthur Burns, about that.

KM 

 

Deflation? Chart Of The Day - ISM Prices Paid


European Manufacturing PMI Declines for “Biggies” in Europe

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

 

The final September figures for European Manufacturing PMI came out today – in aggregate there is a noticeable downturn in the September figures for the major economies (excluding France), in line with our forecast for weaker European economic data in the back half of 2010. We’ll note that the PMI figures in the tables below do not all come from the same sources, although most do, including the big three Eurozone economies of Germany, France, and Italy, which are issued from Markit/Reuters.  That said, our focus is on the changes in the data on the margin, in particular the month-over-month moves. One highlight here is Scandinavia, which continues to outperform, mirrored by its equity market that is up +14.1% YTD and a growth forecast of 3.6% Y/Y this year (Bloomberg), the highest versus its major European peers. 

 

To be clear, our position on Europe remains that we see a clear divergence among countries, similar to our Sovereign Debt Dichotomy theme in 2Q10. Currently we are bullish on Germany and continue to warn of further deterioration in the capital markets of countries like Portugal, Ireland, Italy, Greece, and Spain. One TRADE that has worked for us is long EUR, short USD, despite the ongoing sovereign debt contagion threats across the Eurozone. With the Euro rising to $1.37 today, it’s bumping up against our overbought TRADE (3 weeks or less) line of resistance at $1.38, which we’ll be watching acutely. The TRADE line of support remains at $1.34.

 

Matthew Hedrick

Analyst

 

European Manufacturing PMI Declines for “Biggies” in Europe - manu


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