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RE: PSS, LTD, ARO, WMT & Franchises

R3: REQUIRED RETAIL READING

October 21, 2010

 

Both Limited and Payless look to the franchise model to provide lower-risk growth outside of their core markets.  While this arrangement is not new to domestic brands looking abroad, it’s likely that a substantial number of franchises will need to open before a material positive P&L impact is felt.

 

 

RESEARCH ANECDOTES

 

- A Sperry Store walk through with senior management revealed that the company is still evaluating an apparel line extension.  While no specific plans have been made to launch “Sperry Apparel”, the brand is working with a partner to co-merchandise apparel in its 7 company-owned stores.  This effort will help to determine which aesthetic , price points, and product categories may work alongside the heritage shoe brand.  We’re thinking this may be akin to what J Crew has done with bringing in outside brands to compliment its core offering.

 

- Google’s Think Holiday presentation revealed that the biggest e-commerce chopping day in advance of the holiday’s is not Cyber Monday.  Instead, Green Tuesday (Dec 14th) is currently forecast to be the largest pre-holiday day for internet shopping with sales expected to be $1.095 billion.  For comparison, Cyber Monday is expected to produce $775 million in revenues.

 

- Proving that c-list celebrity fashion brands usually don’t last, Jersey Shore’s JWoww’s line Filthy Couture has shuttered after just one season.  No word yet on the success of other wares being peddled by The Situation or Snooki.

 

 

OUR TAKE ON OVERNIGHT NEWS 

 

Payless ShoeSource Expands Into New International Markets - The retailer, a division of Topeka, Kan.-based Collective Brands Inc., Wednesday announced it has struck franchise deals to open Payless stores in four new international markets: Indonesia, Mexico, Malaysia and Singapore. The franchise model for Payless is proving to be a strong strategy to accelerate PSS's ability to place stores in new countries and with minimal capital investment. In Mexico, Grupo Axo, which has worked with such brands as Coach, Marc Jacobs and Emporio Armani, will partner with Payless on a projected 41 Payless stores in three years. Both companies believe Mexico can ultimately support as many 300 stores, significantly raising Payless’ profile in the fast-expanding Latin American market. Jakarta, Indonesia-based Map Active will represent Payless in Indonesia, Malaysia and Singapore. The company expects to open 20 Payless units across the three countries by 2011, with a larger rollout to follow. The news comes after previous announcements that Payless would enter the Middle East in 2009 and the Russian market this year. <wwd.com/footwear-news>

Hedgeye Retail’s Take: The franchise model is just getting underway representing a significant additional growth channel for the company beyond its coveted Saucony and Sperry brands. The bigger question at this point is how aggressive these franchise partners intend to ramp locations – surely more to come here today with the company hosting its analyst day today.

 

Limited Brands Looks to International Growth - Leslie H. Wexner, chairman and chief executive officer of $9 bn Limited Brands Inc., is back at it — looking at the big picture, especially abroad. “I would guess the potential on international is probably equal to the U.S. If I believe I could do $20 bn in North America, there is probably another $20 bn across the world,” he said, with Limited’s major brands — Victoria’s Secret, Pink, La Senza and Bath & Body Works. Wexner cited the possibility of opening “several hundred” stores in the Middle East, including 200 in Turkey. And in Brazil, where a new 1,000-square-foot Victoria Secret airport store is running at about a $10 mm annual rate, The perception of Victoria, Victoria’s Secret beauty and accessories is high and Brazil probably has the potential for 300 to 500 stores. <wwd.com/business-news>

Hedgeye Retail’s Take:  Rare comments from the CEO and founder of Limited indicating substantial growth for the brands.  However, recall that most growth in the Middle East and Turkey is conducted through licensing/franchise arrangements.  While more profitable from a margin rate perspective, it will take significant scale to see these efforts impact the P&L.

 

Aéropostale Opens Flagship in Times Square Friday - The 19,000-square-foot flagship, which opens in Times Square here Friday, will have high-tech interactivity residing alongside good, old-fashioned New York imagery. A 120-foot animated billboard made up of 2 mm LEDs features varying content, including the store’s own shoppers, who can dance with virtual Aéropostale models in a 700-square-foot room called the Balcony. A camera embedded in the screen will film their antics and display them on the billboard 20 minutes later. Just the idea of the Balcony, a room devoid of product and cash registers, and devoted solely to shoppers’ entertainment, is unorthodox. The flagship has been designed to raise Aéropostale’s profile and is viewed as the company’s ticket overseas. <wwd.com/retail-news>

Hedgeye Retail’s Take:  Finally, all three major teen retailers have flagships in Manhattan!  Note that ARO, AEO, and Forever 21 are all located in Times Square with megastores.

 

Africa's 1 Billion Consumers Too Many for Wal-Mart to Ignore - Members of Africa’s burgeoning middle class prompted Wal-Mart Stores Inc. on Sept. 27 to propose purchasing Massmart, the African continent’s third- largest retailer, for $4.6 bn. With 288 stores in 14 African countries, purchasing Johannesburg-based Massmart would enable Wal-Mart to profit from one of the world’s fastest- growing retail markets. Africa’s population reached 1 bn last year and after economic growth averaging 4.9% from 2000 to 2008 the number of families with an income of more than $20,000 a year has exceeded India’s, according to a report by McKinsey & Co. Inc. <bloomberg.com>

Hedgeye Retail’s Take:  While it’s easy to paint Africa with a broad brush given its 1 billion consumers, we highly doubt we’ll be seeing any Massmart/Wal-Marts opening in some of the more politically unstable nations on the continent.  Growth likely remains centered in the most developed and stable nations.

  

Neiman Marcus Launches Gift App - Upscale department store Neiman Marcus has launched a holiday gift app for Apple Inc.’s iPhone and iPod Touch devices that offers shoppers free delivery and gift wrap, and the ability to shake their devices for a special surprise. The app displays gift ideas updated daily by the Neiman Marcus buying team and a Surprise Me feature that enables shoppers to view unique gift ideas by shaking their mobile devices. Shaking an iPhone activates the device’s accelerometer, which triggers a function within an app. Shoppers also can browse by price range choosing Little Gems, $100 and under, $200 and under, or $300 and under, or select Indulge to browse more expensive items.  <internetretailer.com>

Hedgeye Retail’s Take:  Just one of many “holiday” apps on the way to spur purchasing and add some fun into the process.  The jury is still out however on the “shaking” motion.

 

Fewer Shoppers Per Channel For Holiday - The NPD Group Inc. went looking for the hot channel for holiday shopping and couldn’t find one. According to a survey by NPD, the percentage of respondents who plan to shop various tiers of distribution for their holiday purchases fell for all of the top 10 distribution channels studied. Discount stores retained the top spot from a year ago but were down to 54% of shoppers from 58%, and online shopping remained at number 2 with a decline to 35% from 37% last year. National chains stayed at number 3 as they dropped to 29% from 32%, and department stores moved up to number 4 from number 5 but still registered a decline in percentage of shoppers, to 22% from 25%. Warehouse clubs dropped to number 7, at 17%, from number 6, at 21 %, last year. Electronics stores fell from number 4 last year, with 26%, to number 6, at 19%. Outlet stores were eighth on the NPD list with 16% of respondents planning to shop there, down from 20% in 2009. Apparel specialty stores retained their ninth-place finish, but were likely to attract 15% of shoppers, down from 18%. In 10th place were off-price retailers, at 13%. <wwd.com/business-news>

Hedgeye Retail’s Take:   Most notable here is the drop in share expected for the consumer electronics chains.  We believe this is largely a result of e-commerce growth and to some degree improved merchandising from the discounters in the CE categories . 

  

Swiss Watch Exports Grew 25.5% in September - Swiss watch exports continued their double-digit growth in September, rising 25.5%, boosted by sales of gold and steel timepieces, the Federation of the Swiss Watch Industry said. "After nine months, the sector has once more confirmed its clearly positive trend and even picked up the pace slightly," the federation said. Watch exports rose 20.8% between January and September. Hong Kong, the largest market for Swiss timepieces, remained the growth leader with an increase of 50.3%, while France emerged as the top European market with a 44.3% jump. <wwd.com/business-news>

Hedgeye Retail’s Take:  This trend remains consistent with prior data suggesting luxury watches (and goods) remain in a substantial recovery mode.  Importantly, while a rebound is underway domestically, most data suggests the strength is centered in Asia with some pockets of strength in Western Europe.


MCD - STRONG QUARTER INDEED

Conclusion: The MCD quarter was clean across the board.

 

September Sales Trends - up 6.1% globally:

  • US accelerated about 40 bps on a two-year average basis (adjusted for calendar shifts)…off of a strong month
  • Europe two-year average trends improved about 210 bps off of a weak August
  • APMEA improved about 120 bps, also off of a weak August

 

Notable trend - US margins continue to be on a roll…peak in sight? US margins are up more than 200 bps YOY each quarter this year….up 270 bps in 3Q10 (7th quarter of growing margins…prior to that, 8 quarters of declines).

 

Changes to the Outlook section were minor and there was no commentary on 2011:

 

Systemwide Sales:

 

2Q10: The Company expects net restaurant additions to add 1.5 to 2 percentage points to 2010

 

3Q10: The Company expects net restaurant additions to add nearly 1.5 percentage points to 2010

 

Inflation:

 

2Q10 - For the full year 2010, the total basket of goods cost is expected to decrease 3-4% in the U.S. and to decrease 1-2% in Europe.

 

3Q10 - For the full year 2010, the total basket of goods cost is expected to decrease 3-4% in the U.S. and to decrease 2-3% in Europe, reflecting favorable comparisons in the first nine months of this year.

 

Capex and unit growth:

 

2Q10 - The Company expects capital expenditures for 2010 to be approximately $2.4 billion. About half of this amount will be reinvested in existing restaurants, including the reimaging of over 2,000 locations worldwide. The Company expects net additions of about 325 restaurants, which reflects the strategic closing of restaurants by McDonald’s Japan.

 

3Q10 - The Company expects capital expenditures for 2010 to be approximately $2.3 billion. About half of this amount will be reinvested in existing restaurants, including the reimaging of approximately 1,800 locations worldwide. The Company expects net additions of about 275 restaurants, which reflects the strategic closing of restaurants by McDonald’s Japan.

 

 MCD - STRONG QUARTER INDEED - U.S. restaurant margins

 

 MCD - STRONG QUARTER INDEED - mcd us sep

 

 MCD - STRONG QUARTER INDEED - mcd eu sep

 

 MCD - STRONG QUARTER INDEED - mcd apmea sep

 

Howard Penney

Managing Director

 


INITIAL JOBLESS CLAIMS FALL 23K FOLLOWING A VERY BIG REVISION

Initial Claims Drop, Yes, But Odds Are They'll Be Revised Higher Next Week

The headline initial claims number fell 23k last week to 452k.  There was a significant revision to last week’s number, increasing it by 13k.  If the revised number had been printed last week, it would have represented one of the top five largest increases in reported initial claims for the year to date.  The prior week’s revision has now been upward for 25 of the last 26 weeks.  If upward and downward revisions were equally likely, the odds of this occurring by chance would be 1 in 2,684,355 (or  1/(26/2^25)). Rolling claims came in at 458k, a decline of 4.25k over the previous week. All told, claims remain in the same band they’ve occupied for the year, and we are still looking for initial claims in the 375-400k range before unemployment meaningfully improves.

 

We don't want to go out on a limb here, but it strikes us that the market is focused mainly on whatever the current print is. Based on chronic upward revision, the illusion can, and is, being created for those who look only at the current print that the jobs environment is improving. In reality, as our charts below show, however, unemployment claims have remained flat as a pancake this entire year. There is no improvement in the data. We just want to make that crystal clear.

 

INITIAL JOBLESS CLAIMS FALL 23K FOLLOWING A VERY BIG REVISION - 1

 

INITIAL JOBLESS CLAIMS FALL 23K FOLLOWING A VERY BIG REVISION - 2

 

In the table 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 JOBLESS CLAIMS FALL 23K FOLLOWING A VERY BIG REVISION - 3

 

Joshua Steiner, CFA

 

Allison Kaptur


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PENN: ITS ALL ABOUT NEW MARKETS

PENN posted a great quarter in a tough environment, exhibiting strong operations but also the importance of exposure to new markets. 

 

 

PENN’s new markets were table games in both PA and WV where the numbers are off the charts.  And there is more of that on the horizon.  While we remain concerned with domestic gaming demand in existing markets, consistent with history, ROIC in new markets will continue to outpace cost of capital by a wide margin.  Maryland had little impact on Q3 due to the late September opening but initial results suggest a 25% ROI.  Up next:  Toledo then Columbus, both 20%+ ROI opportunities.  In fact, as we wrote about in our 06/07/10 note, “COLUMBUS WILL DISCOVER THE AMERICAN CASINO”, Columbus could be the highest EBITDA-producing regional casino (non-Indian) in the country.  Both these properties and their Kansas casino are scheduled to open in 2012 but PENN won’t be done then.  The company recently positioned itself to own and operate three racetracks in Texas where there is a decent probability that slots at racetracks will be legalized sometime in the next five years.

 

New markets are great for most operators fortunate enough to get a license.  But that’s only part of it.  As demonstrated in Pennsylvania most recently, PENN seems to generate outsized ROIs.  Hollywood Casino is generating a 26% ROI on its $310 MM investment in PA.  Preliminary results in MD imply a 25% ROI on PENN’s newly opened casino there.  PENN keeps construction costs low – MD cost only $98 million – stays on budget, and operates efficiently.  Virtually every property/expansion PENN does comes in on time and on budget.  We expect the same from Ohio, Kansas, and Texas.  They also don’t overspend on their stock.  PENN bought back over a million shares at an average cost of $23.21 during the quarter.  The stock closed last night at $31.18.

 

PENN’s results this morning came in largely as we expected but much better than consensus – EBITDA of $162MM was actually $1MM better than our estimate while revenues were $4MM lower primarily due to our modeling of the newly acquired tracks.  Generally speaking, cost controls were better across the board, and flow through on the newly introduced table games in WV and PA was also stronger.

 

Here are the details of the quarter: 

  • At Charles Town, tables games lifting total property revenues by $32MM sequentially, while only increasing non-gaming tax related expenses by $6MM QoQ, resulting in 318bps of margin lift sequentially and a 373bps lift in margins YoY.
  • In Pennsylvania, table games lifted sequential revenues by $5MM but only increased non-gaming tax related expenses by $1MM, which resulted in EBITDA margins expanding 560bps YoY and 220bps sequentially.
  • Hollywood Aurora, Argosy Alton, Hollywood Bay St. Louis, Hollywood Slots & Raceway Bangor beat our EBITDA estimates handily  
    • At Aurora, net revenues came in $0.2MM ahead of our estimate, while costs (ex-taxes) were almost $1MM lower sequentially, despite flat revenues.
    • At Alton, revenues were $0.5MM better than we estimated and costs (ex-taxes) decreased QoQ despite revenue growth.
    • Despite more difficult cost comps, Hollywood Bay St. Louis continued to bring down expenses by 9% YoY
    • At Bangor, margins were almost 100bps better than we estimated driven by an 8% YoY reduction in expenses
  • Empress and Hollywood Tunica missed our EBITDA estimate by more than 10%
    • Empress reported net revenues that were $1MM higher than we estimated but margins were worse.  Despite revenues decreasing QoQ, operating expenses (ex –taxes) actually increased by $1MM.
    • Hollywood lost some share in Tunica, coming in at 6.5% vs. 7.2% last year and 6.9% in 2Q2010
  • The loss at Maryland Jockey Club was almost $3MM larger than we forecasted
  • Other stuff:
    • Corporate expense was $17MM, $2MM lower than we estimated
    • Net interest expense was $3MM higher
    • Bought back over 1m shares at an average cost of $23.21

 

PENN: ITS ALL ABOUT NEW MARKETS - PENN22


INITIAL JOBLESS CLAIMS FALL 23K FOLLOWING A VERY BIG REVISION

*** Our Updated FIG Earnings Scorecard is Included Below ***

 

Initial Claims Drop, Yes, But Odds Are They'll Be Revised Higher Next Week

The headline initial claims number fell 23k last week to 452k.  There was a significant revision to last week’s number, increasing it by 13k.  If the revised number had been printed last week, it would have represented one of the top five largest increases in reported initial claims for the year to date.  The prior week’s revision has now been upward for 25 of the last 26 weeks.  If upward and downward revisions were equally likely, the odds of this occurring by chance would be 1 in 2,684,355 (or  1/(26/2^25)). Rolling claims came in at 458k, a decline of 4.25k over the previous week. All told, claims remain in the same band they’ve occupied for the year, and we are still looking for initial claims in the 375-400k range before unemployment meaningfully improves.

 

We don't want to go out on a limb here, but it strikes us that the market is focused mainly on whatever the current print is. Based on chronic upward revision, the illusion can, and is, being created for those who look only at the current print that the jobs environment is improving. In reality, as our charts below show, however, unemployment claims have remained flat as a pancake this entire year. There is no improvement in the data. We just want to make that crystal clear.

 

INITIAL JOBLESS CLAIMS FALL 23K FOLLOWING A VERY BIG REVISION - rolling

 

INITIAL JOBLESS CLAIMS FALL 23K FOLLOWING A VERY BIG REVISION - raw

 

Hedgeye Earnings Scorecard

Below we show our rolling earnings scorecard which includes all financials that have reported thus far in the earnings season, along with subsector averages and our proprietary Hedgeye Earnings Score. The score evaluates company performance across ten measures, looking for either sequential improvement or decline and performance relative to expectations. A "perfect" score would be 10 while the worst possible score is negative 10. Over the course of an earnings cycle, it can get confusing trying to gauge how both individual companies and whole subsectors are faring relative to the group. It is our intention to simplify that process with this product, which we will be publishing each morning over the course of the earnings season as an embedded table in our regular morning posts.

 

INITIAL JOBLESS CLAIMS FALL 23K FOLLOWING A VERY BIG REVISION - earnings score

 

 

Yield Curve

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.  Yesterday’s closing value of 211 bps is up from 206 bps last week.

 

INITIAL JOBLESS CLAIMS FALL 23K FOLLOWING A VERY BIG REVISION - spreads

 

INITIAL JOBLESS CLAIMS FALL 23K FOLLOWING A VERY BIG REVISION - spreads QoQ

 

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

 

INITIAL JOBLESS CLAIMS FALL 23K FOLLOWING A VERY BIG REVISION - subsector perf

 

Joshua Steiner, CFA

 

Allison Kaptur


THE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - October 21, 2010

As we look at today’s set up for the S&P 500, the range is 13 points or -0.44% downside to 1173 and 0.66% upside to 1186.  Equity futures are trading above fair value in a continuation of Wednesday's rally.

 

Chinese Q3 GDP came in above forecasts and there have also been some strong services and manufacturing PMI data out of Germany.  The dollar spiked in early Asian trading after the WSJ reported that Treasury Secretary Geithner believed there was no reason for the dollar to fall further.  Since then the dollar index has fallen back to trade close to its 10-month low of 76.15.

 

Earnings remain a focus, including results from LUV, FCX, AXP, MCD , CMG and CAT.  Jobless Claims and the Philadelphia Fed will be key economic reports.

  • Alliance Data Systems (ADS) forecast earnings below est.
  • Covanta Holding (CVA) 2010 EPS may beat est.
  • EBay (EBAY) 4Q sales, EPS forecast ahead of est.
  • Fidelity National Financial (FNF) 3Q EPS beat est. 
  • Netflix (NFLX) 3Q EPS, rev. beat est., raised FY view
  • Raymond James Financial (RJF) 4Q rev. beat ests.
  • Xilinx (XLNX) forecast 3Q rev. below est.  

 PERFORMANCE

  • One day: Dow +1.18%, S&P +1.05%, Nasdaq +0.84%, Russell 2000 +1.15%
  • Month/Quarter-to-date: Dow +2.97%, S&P +3.24%, Nasdaq +3.75%, Russell +3.84%
  • Year-to-date: Dow +6.52%, S&P +5.66%, Nasdaq +8.30%, Russell +12.27%
  • Sector Performance: Material +2%, Telecom +1.4%, Energy +1.4%, Industrials +1.3%, Consumer Disc +1.2%, Financials +1.1%, Healthcare +0.8%, Utilities +0.8%, Tech +0.8%, Consumer Spls +0.6%.

 EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 1566 (+3543)
  • VOLUME: NYSE - 1100.94 (-13.42%)
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Monster WW +6.53%, Boston Scientific +5.53% and Micron Tech +5.49%/Marshall & Ilsley -10.22%, Intuitive Surgical -7.02% and Comerica -6.38%.
  • VIX: 19.79 -4.70% - YTD PERFORMANCE: (-8.72%)
  • SPX PUT/CALL RATIO: 1.93 from 1.46 +32.18%

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 15.86 0.203 (1.296%)
  • 3-MONTH T-BILL YIELD: 0.14%  
  • YIELD CURVE: 2.16 from 2.13

COMMODITY/GROWTH EXPECTATION:

  • CRB: 299.00 +2.05%
  • Oil: 82.54 +2.97% - BULLISH
  • COPPER: 379.35 +0.96% - OVERBOUGHT
  • GOLD: 1,346.32 +0.40% - BULLISH

CURRENCIES:

  • EURO: 1.3961 +1.08% - BULLISH
  • DOLLAR: 77.171 -1.30%  - BEARISH

OVERSEAS MARKETS:

 

European markets

  • FTSE 100: +0.64%; DAX +0.57%; CAC 40 +0.71%
  • Major indices were firmer in response to some strong manufacturing and services PMI data out of Germany and a slew of earnings from the region which generally met or surpassed expectations.
  • Food & Beverage, P&HG and Auto names are pacing gainers amid another sluggish performance by banks
  • Novartis Q3 EPS $1.36 ex-items vs Rtrs $1.24
  • Credit Suisse Q3 net CHF 609M vs Rtrs CHF 857.5M
  • France Oct Preliminary Services PMI +55.3 vs consensus +57.5; Manufacturing PMI +55.2 vs consensus +55.3
  • Germany Oct Preliminary Services PMI +56.6 vs consensus +54.8; Manufacturing PMI +56.1 vs consensus +54.6
  • EuroZone Oct advance Services PMI 53.2 vs consensus 53.7; Manufacturing PMI 54.1 vs consensus 53.2
  • UK Sep Retail Sales +0.5% y/y vs consensus +1.0% and prior revised to +0.8%

 

Asian markets

  • Nikkei (0.05%); Hang Seng +0.39%; Shanghai Composite (0.68%)
  • Asian markets were mixed in a tight range today as China’s growth slowed, though the pace was expected.
  • Hong Kong rose, but China Mobile lost 2% as its nine-month results missed expectations.
  • South Korea rose slightly. Samsung Electronics rose 3% after revealing it is bidding for a controlling stake in Medison.
  • Taiwan finished flat
  • Australia finished flat, with miners leading a recovery in cyclical stocks.
  • Japan was flat as the effects of a strong yen fought with a better mood inspired by the rebound in the US.
  • Banks fell on profit-taking, leading China down.
  • China Q3 GDP +9.6% y/y vs survey +9.5% weakest in a year
  • China - September CPI +3.6% y/y, matching expectations - fastest increase in two years
  • China - September PPI +4.3% y/y vs survey +4.1%.
Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends

 

THE DAILY OUTLOOK - S P

 

THE DAILY OUTLOOK - VIX

 

THE DAILY OUTLOOK - DOLLAR

 

THE DAILY OUTLOOK - OIL

 

THE DAILY OUTLOOK - GOLD

 

THE DAILY OUTLOOK - COPPER



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