Thursday, August 5, 2010

Morning Note...


Futures are ~50bps lower this morning as retailers same-store-sales are generally weaker than expected, and Initial Jobless Claims disappoint.  For the week ending July 31, jobless claims jumped to 479k from the prior 460k level.  The survey estimate was 455k.  Additionally, Continuing Claims for the week ending July 24 were 4.537M vs. the 4.515M expectation.  Regarding same-store-sales, Barclay’s offers the following summary (also see quote section below for a more detailed look):

Summary:  Overall these results seem worse than expected thus far with SSI AEO GPS ARO and GPS all taking 2Q expectations lower.  Only ZUMZ LTD and TJX have good comments around 2Q.  The big dog of the day thus far is ARO.  The fact they are taking down guidance is a first and really bad timing heading into Back to School.  The winner of the day seems to be LTD who quietly and under the radar seems to be putting up a fantastic year.  

            COMPS BETTER:     LTD, ZUMZ, ANF, M, KSS, SKS
COMPS IN-LINE:    FRED, COST, SSI, AEO, GPS, TJX, TGT , JWN
COMPS WORSE:      BIG, HOTT, SSI, BKE, WTSLA, BONT, ARO, ROST, JCP

GUIDANCE BETTER:  ZUMZ, LTD, TJX, KSS
GUIDANCE IN-LINE: ROST
GUIDANCE WORSE:   SSI, AEO, GPS, ARO, GPS, JCP

Pre-mkt Movers:
ANF (+2.4%), ARO (-9.4%), BKE (-6.3%), GPS (+6.3%), JCP (-4.0%), KSS (+1.0%), LIZ (flat), LTD (+3.3), M (+0.3%), TGT (-0.2%)

Elsewhere, the ECB left key interest rates unchanged at 1% and offered relatively neutral-to-positive commentary (The Bank of England also left rates unchanged at 50bps as expected):

Trichet Calls Interest Rates ‘Appropriate’ as Debt Crisis Cools (2010-08-05 12:36:19.961 GMT)

Aug. 5 (Bloomberg) -- European Central Bank President Jean- Claude Trichet said interest rates in the 16-nation euro area are “appropriate,” signaling he sees no need to shift borrowing costs any time soon.  “We continue to expect price developments to remain moderate,” Trichet told reporters in Frankfurt today after the ECB’s Governing Council set its benchmark rate at a record low of 1 percent for a 16th month. He also said that economic data for the third quarter has so far been “better than expected.” As the euro-area economy gathers strength and its bond markets show signs of stabilizing after the sovereign debt crisis, Trichet faces the challenge of signposting how the ECB will scale back its supply of unlimited cash to banks without throttling the recovery or roiling financial markets.

Looking ahead to tomorrow, BTIG’s Mike O’Rourke offers a solid perspective on where we have been relative to recent market action:

The S&P 500 continued to slowly grind higher and posted its highest close since May 17th.  Today’s close was also the approximate level of the S&P 500’s close on the day of the “Flash Crash.”  Also in close proximity is the June 21st intraday high, which needs to be exceeded to place the S&P 500 back on a positive technical track.  The current levels are becoming more interesting because the index is only modestly above its 200 day moving average.  In addition, the 1135-1150 trading range was notable in early January until the market broke upon the President’s unveiling of the Volcker Rule, which was immediately followed by the first sell off in reaction to the European sovereign debt crisis.  The only time the S&P 500 has traded above the current levels since the “Flash Crash” was the short lived selling opportunity created by the EU-IMF announcement of the “Shock & Awe” deal to backstop European sovereign debt.  The confluence of all of these events occurring in the proximity of the current level means it shapes up as an important technical resistance level, which is perfect, just in time for the all important Employment situation report on Friday. 

Regarding yesterday’s action stemming from the China headline that hit mid-afternoon (Gov’t says banks should prepare for 60% drop in real estate values), ISI had this to say:

A Bloomberg report indicates that China's bank regulator has asked for stress tests assuming home price declines of up to 60%.  We find no confirmation of this story in China.

Down 60% is entirely implausible except in two small, special-case China markets.  60% (or even 30%) broadly, is remote.  The 30% decline, stress-tested earlier, would lift NPLs from their current 1.3% to about 1.8% -- manageable. 

Beijing has the policy tools to keep 30-60% from happening.  Given the loan explosion in 2009, it is not surprising that the CBRC has been conducting contingency discussions. 

Asia mixed overnight.  Europe slightly higher.  EUR/USD 1.3215.  USD -40bps.  Oil -80bps.  Gold +30bps.

S&P 500 PreMarket 8:30am (last/% change prior close/volume):  N/A…new BBERG launchpad a bit tricky.

Today’s Trivia: It’s well documented that the Bull Shark has the highest testosterone levels of any animal…how many times greater is it than the average human male?

Yesterday’s Question:   Which is considered the fastest shark?
                                                                                                                                                                  
Yesterday's Answer:  The Mako. 

Best Quotes:  Morgan Stanley SSS summary…

KEY TAKEAWAYS:
Bottom Line:   July is a shoulder month for retail, and investors are largely focused on the upcoming difficult comparisons in the fall/winter and into 2011. Today's results will only exacerbate those concerns as overall results were likely disappointing.    Furthermore, we have not seen any big institutional money buying retail recently.  With upcoming Q3 guidance, tougher comps, we do not think this will change unless US employment figures show real improvement (giving investors a shot of looking past the near term fundamental challenges), and/or back-to-school sales (one of the highest volume periods of the year) come in better than expectations. 

1) Winners/Losers in the Month.  Department stores, once again, were the winners, though none of the names significantly beat consensus/whispers, so reactions to the upside could be limited.   Off Price retail, after being the big outperformer for a long time, is showing cracks.  Similarly, another long term beat/raise story that showed real weakness today, and is the biggest loser of the day, was ARO, within teen specialty retail, while LTD remained best in class. GPS - probably had one of the lowest expectations out of any name in the space (down 30% from high, and very compelling free cash flow/balance sheet), and today's results will probably come as (at least) a temporary relief, given the July comp and EPS guidance.  
2)  2-yr trends for July overall better than May/June.  Generally, small improvement across the board, vs. the May/June time period, showing demand did somewhat pick up on an underlying basis, particularly for many of the department stores.  However, the notable decelerations were from JCP and ARO. 
3) Electronics Continue to be Weak: COST indicated that TV sales remained negative but showed improvement from May and June, while computers were flat (vs. down in previous months).  TGT said that they continue to experience soft sales in electronics, video games, music and movies, and BJ said that they continue to experience weaker sales in television.   As far as this pertains to BBY, this is generally known by investors.  
4) Inflationary Comments from COST:  Inflation +1%, in line with recent months but produce slightly inflationary for the first time and meat prices up mid single digits.  We have seen increased interest in grocery stocks of late; this commentary might further support those names. 
5) Inventory Levels:  We are still going through the pre-recorded conference calls, however, it does not seem that inventory is a real major concern right now.  This remains a big issue for investors, given a weakening demand environement, and the potential for mark-down pressures.

DEPARTMENT STORES:
KSS: beat 4.1%, vs. Consensus +3.8%, and MS +5%. The two average for July was +2.3% vs May/June 0.9%.  The company now expects 2Q EPS to be $0.80 to $0.82 vs prior $0.70-$0.75 and Consensus $0.78.
M:  
beat +7.3%, vs. Consensus +5.4%, and MS +7%. The two average for July was (1.7%), vs May/June (2.5%).
SKS: beat 6.4%, vs. Consensus 5.4%, and MS +6%. The two average for July was (5.0%), vs May/June (5.7%).
JWN: inline+7.6%, vs. Consensus +7.6%, and MS +7%.  The two average for July was 0.4% vs May/June (1.3%). 
JCP: miss (0.6%), vs. Consensus +3.3%, and MS +4%. Guidance was for "in-line with the quarterly comp of +2.5-3%".  The two average for July was (6.5%), vs May/June (3.4%). The company now expects 2Q EPS to be at the lower-end of their prior $0.05 to $0.08 range (which includes a previously announced $0.05 charge).

TEEN SPECIALTY RETAIL:
ANF: beat +7%, vs. Consensus +3.5%. The two average for July was (10.5%) vs May/June (12.7%).
AEO: inline at flat, vs. Consensus +0.4%.  The company now expects EPS to be $0.12 to $0.13 vs the prior "at the low-end of $0.12-$0.16" and vs. Consensus $0.12.  The two year average for July was (5.5%) vs May/June (6.6%). 
ARO: miss 1%, vs. Consensus +7.1%. The two average for July was 3.5% vs May/June +10%.  The company also indicated that EPS would fall short of prior plan and consensus: NOW $0.45 to $0.46, vs. prior $0.45 to $0.48, and Consensus $0.49. 
OFF PRICE RETAIL:
ROST:  miss 2%, vs. Consensus +3.5%. Guidance was for +3-4%.  The two average for July was 4% vs May/June +4.7%. Raised 2Q EPS to $1.06-$1.07 vs prior $1.00-$1.02 and consensus $1.02.
TJX: miss 2%, vs. Consensus +2.8%. Guidance was for +2-4%.  The two average for July was 3% vs May/June +3%. The company indicated that 2Q EPS would be at or slightly above the high-end of earlier estimates of $0.70-$0.73 and consensus $0.72.

LARGE CAP SPECIALTY RETAIL:
LTD:  
beat +12%, vs. Consensus +5.4%. Guidance was for a +MSD increase.  The two average for July was 2.5% vs May/June (1.1)%. The company now expects 2Q EPS of $0.34-$0.36 vs prior $0.27-$0.32 and Consensus $0.34.   The company expects low single digit postive comps during August. 
GPS: inline 1%, vs. Consensus +0.2%, Gap North America was (6%) and Old Navy was 6%.  The two average for July was (3.5%) vs May/June (3.8%).   The company also indicated that Q2 EPS would be $0.34-$0.35, vs. Consensus $0.36. 

DISCOUNTERS:
TGT: inline 2%, vs. Consensus +2.1%.  Guidance was for +1-3%. The two average for July was flat vs May/June (2.3%).  The company guided August comps to increase low single digits.

CLUB STORES:
COST: in-line +6% vs consensus +5.6% and MS +5%.  US core comps of +3% was in line with MS estimates.  International comp of 14% (8% in local currency) also matched MS estimates.  Traffic was 3.5%, basically in-line with the last few months.  Ticket was +2.5% and slightly positive excluding F/X and gas, which is an improvement as it had been running slightly negative.   
BJ: miss +2.8%,  below MS estimate of +4% and consensus of 4.4%.  Core merchandise comp was 1.9%, below MS estimate of 3.5%.  Traffic was up 4% (inline with recent trends) and average transaction was down 2% (worse than recent trends).