Divergence between high and low-end retailers

Mentioned in a previous post, many retailers suffered cost pinch. Rising raw materials costs have eaten into the profit margin of retailers. Higher gasoline prices have slowed shopping traffic. In addition, slow economic growth has rendered  it hard for retailers to pass on higher costs to customers. The hardest hit sofar have been low to mid end retailers including teenager apparels. However, high-end and luxury goods retailers have sofar dodged the bullets.

According to Associated Press,

High-end jewellers, Tiffany & Co (TIF) reported a 25% jumped in first quarter profits from a year ago across all regions, including even the calamity striken Japan.

According to Sales in Japan rose 7 percent to $123.4 million. However excluding the stronger yen, sales fell 3 percent. Still, that was better than Tiffany expected.

Revenue in the Americas, Tiffany's largest region, rose 19 percent to $374.7 million. The region includes the U.S., Canada and Latin America. Revenue from stores open at least one year rose 17 percent, including a 23 percent jump at Tiffany's flagship store in New York, a mecca for tourists.

Revenue in Asia-Pacific rose 37 percent to $167.2 million. In Europe, revenue rose by a quarter to $85.6 million.

While some had speculated results in Hawaii and Guam might suffer from fewer Japanese tourists, the six-store region's revenue in stores open at least one year actually rose 30 percent.

The company does not have problem passing on costs to customers.

High precious metal and diamond costs caused Tiffany to raise prices earlier this year, and Tiffany said it may raise prices again in various categories and regions to offset the higher costs. "But the rising prices have not deterred shoppers," Investor Relations Vice President Mark Aaron said.

..............."Customers are certainly aware of rising commodity costs and we have not experienced any meaningful resistance to higher prices," he said.

Interestingly, lower priced items such as silver jewelry's growth is constrained

The U.S. economic environment that is affecting spending by some of our silver jewelry customers at entry-level price points will likely remain challenging for a while," Aaron said.

Tiffany's results are echoed by other luxury retailers such as Coach (COH), Neiman Marcus that owns Neiman Marcus and Bergdolf Goodman, Signet (SIG) that operates Kay Jewelers.

Will the divergence persist through this difficult time for retailers or we will see convergence at the downside soon?

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.


Disclosure: The blog author does not own any of the above mentioned positions in her personal account as of May 28, 2011.

Crop prices rise

As the market went through a couple of weeks of choppy and mostly downward sessions, shares of fertilizers companies such as POT, MOS, CF seems to have navigated it quite smoothly these few days. One of the key reasons is prices of crops such as corn, wheat, soy bean have resumed upward trend again after participating the commodity sell-off in the last couple of weeks. The much talked about planting delays in North America since April has finally taken a toll on crop futures prices.

From Agriculture.com,

Time is running short for John Brink to plant his corn crop.


The southern Illinois farmer had put just about 7% of the crop in the ground as of Friday following weeks of delays due to rain. This is a sharp contrast from typical years, when he would normally have finished planting already.

"We are way behind," he said via cellphone from one of his fields.
Farmers across the Midwest have similar stories. Wet weather has kept them out of their fields and pushed corn prices back near all-time highs set last month.

The clock is clicking. If the weather is not clearing up soon, farmers may have to give up planting this season altogether. Corn futures price July contract is on its way to break historic high. Again. Shares of fertilizer companies, farming machinery companies are almost in tandem with crop prices , especially corn prices, in the last few months. Although my conjecture is that the broader market may face a bumpy road into the summer, and most likely a downward one, shares of agricultre-related companies can find some support in strong crop prices, albeit with increased volatility.

To see relationships between crop prices and fertilizer companies, please see related posts:
3 cases for POT

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.



Disclosure: The blog author does not own any of the above mentioned positions in her personal account as of May 26, 2011.

Unrevised GDP Figure Disappoints

Economic growth remains anemic with the year-over-year GDP growth well lower than 3%, a rate that is believed to be the critical to sustainable improvement in the job market.

From Wall Street Journal

The economy did not get the hoped for upgrade for the start of the year. The Commerce Department's second estimate for quarter GDP growth was unrevised at up 1.8 percent annualized and came in lower than the consensus forecast for 2.1 percent. The first quarter remains notably softer than the 3.1 percent pace in the fourth quarter.

Unfortunately, demand numbers were nudged down and inventory investment bumped up. Final sales of domestic product were revised to an annualized 0.6 percent from the initial estimate of 0.8 percent. Final sales to domestic purchasers were revised to 0.7 percent from the original estimate of 0.9 percent annualized. The downward revision to final sales was mainly in personal spending, now at up 2.2 percent instead of the initial 2.7 percent for the first quarter.

For overall relative strength (not merely the direction of revisions), PCEs growth remained moderately healthy. Also, business investment in equipment & software is strong. Inventory investment is positive but levels are still low. Weakness remained in government purchases, nonresidential structures, and net exports.

Even though the headline number was disappointing, odds are that growth will not slow further in coming quarters. Momentum is still favorable for consumer spending, equipment investment, exports, and inventories.

Initial Unemployment Claims Data Are Not Upbeat

From Wall Street Journal

Initial jobless claims rose 10,000 in the May 21 week to a 424,000 level that's 20,000 higher than expected. Revision to the May 14 week is also a negative, up 5,000 to 414,000. The Labor Department isn't citing any weather or auto-related factors for the results. The four-week average of 438,500 is nearly 30,000 higher than a month ago in a comparison that points to trouble for the May employment report. Even the four-week average for continuing claims is higher, at 3.742 million in data for the May 14 week vs 3.702 million in mid April. [Click on the diagram to see a larger view]

In the meantime, GDP was not revised as hoped.

Family Dollar is Backed by Ackman

In a previous post, Family Dollar (FDO) is briefly mentioned as a retailer that may suffer a cost pinch because it may find difficulty in passing on costs to its relatively lower-end customers. However, the stock is not a good short candidate because it is backed by renowned hedge fund manager Bill Ackman.

In today news, Ackman acknowledged that he had been actively buying shares in FDO, believing a push in the management (implying that he may adopt an activist role) allows the retailer to catch up with its peer, Dollar General (DG). The hedge fund mogul also cites a 70% upside for the shares ($92 dollar per share including dividend. In the meantime, he also views FDO as a potential candidate for leveraged buy-out.

In sum, although I believe that low-end retailers will suffer the most in this round of cost pinch, I would definitely restrain myself from shorting these companies that are backed by strong hands.

Mitigating Losses in an Option Position

Options are often known for increasing leverage with limited risks. However, losses are losses. Because options are less frequently used than equities, people often feel that there is nothing they can do when a uni-directional option bet does not go the way they have intended. In fact, they are many ways to mitigate losses or even sometimes to turn losing positions into profitable ones. The following is one of the many scenarios:

Scenario:
1. Losing position: Long VIX 20 call at $1.75. Currently, VIX is $17.80
2. Old cost: $1.75
3.Trader's new expectation: The market may not be as bearish as expected, VIX may not jump high.
4.Mitigating losses: Sell 2 VIX 20 call at $1.50 and buy 1 VIX 16 call at $3.00
5. New position: 1 VIX 20 call and 1 VIX 16 put (A bull spread)
6. New cost: $1.75 (incurred by the old position) and zero for the new position.

The new position has lowered the breakeven point from 21.75 to a much lower point at 17.75. VIX does not have to rise as high for the trader to break-even. On expiration day, if VIX closes at $18.50, the trader will have a small profit of $0.75 instead of a loss of $1.75 if he had stuck to his initial position. Note that this strategy is best applied with the new position incurring little to no cost other than commissions.

Hope this helps. Please feel free to comment if you have any other strategy to mitigate/reverse losing positions. For more details on option strategies, I find "Options as a Strategic Investment" by McMillan quite useful. It is much more practical than John Hull's " Options, Futures and other Derivatives".


Click on the image to review the book

A Shorts List of Retailers

I rarely write about shorts. As most of you have known, shorting a stock theoretically involves unlimited risks/losses. Therefore, before you even consider using this as a reference, you must have enough trading experiences that will allow you to reverse/mitigate risks should things do not go the way as planned.

The make-up of this list is based on the following assumptions:
1. Retailers are facing increased cost pressure and difficulty to pass on to consumers
2. Gasoline prices stay high into the summer and deter shopping traffic.
3. Risk aversion heightens going into summer.
4. The target price is primarily calculated using the lowest P/E among peers (that I consider as relevant) in the category. E.g. shoes (TBL is the one with the lowest p/e)=15.58. Some adjustments (adding premium) have been made for growth and luxury stocks like LULU, SKS, ANF. As this is based on a standard, methodical calculation, further adjustments should be made based on your research of these companies. For example, there may be substantial risks shorting stocks that may be taken over. Rumors had that ANF may be taken over last November.

If you have doubts about the above assumptions, then you probably should stop here.
Click on the diagram to see a larger view:

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author does not have any of the above position in her personal account as of May 23, 2011



ICSC showing temporary slowdown

The International Council of Shopping Centers and Goldman Sachs Retail Chain Store Sales Index dropped 1% in the week ended Saturday from the week before on a seasonally adjusted, comparable-store basis.


"The wettest comparable week in 10 years--combined with cooler temperatures--negatively impacted spending on apparel and other seasonal merchandise," ICSC Chief Economist Michael Niemira said, adding seasonal items may see a bump as consumers gear up for Memorial Day weekend.

On a year-on-year basis, the reading rose 3.1%, easing slightly from the growth posted in the prior week.
For May, ICSC still expects monthly industry retail sales will increase by 3% to 3.5%.

                  Week Ended Index 1977=100   Yr/Yr Change   Weekly Change


21-May-11 512.0                                        3.1%                 -1.0%

14-May-11 517.0                                        3.2%                 -2.0%

07-May-11 527.6                                        2.7%                   0.0%

30-April-11 527.4                                        2.8%                 -0.8%

An Opportunity for Liquefied Natural Gas?

There has been a divergence of natural gas price between the United States and the rest of the world, especially Europe and Asia. Natural gas price of the United States is at about 30% discount of that of Europe and Asia.

From the US Energy Information Administration (EIA),

Two important spot prices for natural gas are the Henry Hub in the United States and the National Balancing Point (NBP) in the United Kingdom. The difference between NBP and Henry Hub spot prices has increased significantly since early 2010. Relative prices in these two locations can be important to spot suppliers of liquefied natural gas (LNG) who are able to select cargo delivery destinations in order to maximize returns.


Reasons for the change in relative prices include: increasing production and expanding natural gas storage volumes in the United States (driven by shale gas developments), a stronger price linkage in Europe between rising crude oil and natural gas, high European demand which reduced European natural gas storage inventories this winter, and supply uncertainty associated with the diversion of LNG cargoes from Europe to Japan to help offset the loss of nuclear power generating capacity following the earthquake and tsunami. Japan is the world's leading consumer of LNG. [Click on the image for a larger view]

Things may change. US natural gas companies may be able to sell to much higher prices in all trading countries following the US Energy Department's decision to allow Cheniere Energy Partners (LNG) to
export up to 803 billion cubic feet of gas a year from its Sabine Pass LNG terminal in Louisiana. The gas will be carried on tankers after being chilled to super-low temperatures to become liquefied natural gas, which makes it easier to transport by ship.The Energy Department said this is the first time an exporter has been allowed to send natural gas from the lower 48 states as liquefied natural gas, or LNG, to all U.S. trading partners. Some believe that this decision paves the way for more approvals of exports. Southern Union (SUG) and BG group are applying for an approval to export from Lake Charles Terminal.

LNG's and its subsidiary, Cheniere Energy Inc (CQP)'s shares soared on this news. SUG's shares also surge on hopes that it may get its approval soon.



Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.



Disclosure: The blog author does not own any positions in the above stock in her personal account as of May 23, 2011.

Existing Home Sales Continued to Show Weakness

From Wall Street Journal

The housing sector continues to stumble with April existing home sales coming in a little below expectations at a 5.05 million annual unit rate, down 0.8 percent in the month with the year-on-year rate moving into the negative double digits at 12.9 percent. Supply on the market ballooned to 9.2 months at the current sales rate vs 8.3 months in March.

But price readings are positive in the report with both the median and average moving higher, up 2.4 percent on the median to $163,700 with the average at $214,600 for a 3.5 percent gain. High supply however won't be supporting further increases for prices which however are very affordable as mortgage rates are favorable. Yet the housing sector just can't get going, weighed down by distressed sales and difficult credit conditions.

Retailers feeling the cost pinch

Echoing the previous post, "Retailers the next leg to fall", apparel and shoe retailers continue to feel tremendous cost pressure that they find it hard to pass on to consumers. Many clothing sellers plan to raise prices this summer and fall to make up for higher costs, but there will be limits to how much shoppers will tolerate in a still challenging economy.



Gap's shares (GPS) fell $3.63, or 15.6 percent, to $19.66 in after-hour trading as the company announced a decline in EPS and revenue. Gap now expects to earn $1.40 to $1.50 per share for the year, down from its February forecast for $1.88 to $1.93 per share, citing increased costs. Before Thursday's earnings report, analysts expected $1.84 per share, according to FactSet.

The company claimed that it had to spend 20% more on each item it produced. Other retailers had generally reported 10-15% hikes in cost.
 
Today, the worse-than-expected results sent shares of Aeropostale (ARO) down $2.04, roughly 10 percent, to $19.32 in after-hours trading. The company cited higher costs and softer sales. This drop in shares was after dropping as much as 16% in early May as the company first warned about cost pressuring margins.

Earlier on, Timberland Co (TBL) saw its shares plunging 32% as it expected margins to shrink this year as the shoemaker battles rising product and labor costs.

As we are getting into the summer, the list of retailer sell-off list may expand as companies, especially low-to-mid end, fail to pass on higher costs to customers. The most vulnerable may be those of the low end such as DLTR, FDO, DG, WMT, COST, TGT, BIG, to name a few, although names like DLTR, FDO, DG may be helped by more thrifty buyers as the economy slows.

For those who do not like the hassles of doing research on individual companies, building short positions in retailer ETF such as XRT into the summer may offer favorable risk/reward profile.

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.


Disclosure: The blog author does not own any of the above positions in her personal account as of May 19, 2011

Retailers the next leg to fall

Low-to-Mid end stores are reporting more cautious customers, spending on necessities such as food and gasoline and not the others.

From Reuters,

In general, retail earnings looked all right in the quarter ended around April 30, said Kurt Salmon retail strategist John Long, but shoppers were largely absorbing higher costs just on food and gasoline and had yet to face looming increases other goods.

"We're already starting to see a little bit of margin pressure," Long said. "And we think that as we get into the summer and fall, when we see bigger price increases ... that may cause some consumers to pull back."

............................At BJ's, the No. 3 U.S. warehouse club chain, shoppers traded down in both brands and package sizes, Chief Financial Officer Bob Eddy said during a conference call.


............................The U.S. recovery will continue to be slow and uneven, particularly for more moderate-income households, Target (TGT) Chief Executive Gregg Steinhafel said during a conference call.


.............................Wal-Mart Stores Inc (WMT) said its customers were showing pronounced signs of living paycheck-to-paycheck, as sales at its U.S. discount stores open at least a year had fallen for two straight years.

In my opinion, as long as gasoline prices stay close to $4 at the pump, this is going to be a slow and long summer and even fall for many retailers, especially those with very little margin to squeeze such as discounters, supermarkets, low-end department stores as they start to pass on cost increases to customers in the next few months.


Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.



Disclosure: The blog author does not have positions in the above stocks in her personal account as of May 18, 2011

Housing starts do not indicate a recovery

From Wall Street Journal

The annualized pace of housing starts posted 0.523 million units below the median market forecast for 0.570 million units and is down 23.9 percent on a year-ago basis. ......................................................................

By region, the drop in starts in was led by a monthly 23.0 percent plunge in the South with the Northeast declining 4.8 percent. However, gains were seen in the Midwest and West, up 15.7 percent and 3.7 percent, respectively.

Housing permits have been volatile in recent months but trending flat. Housing permits declined 4.0 percent in April, following a 7.5 percent surge the month before. Overall permits came in at an annualized rate of 0.551 million units and are down 12.8 percent on a year-ago basis.

The bottom line is that housing is flat and at anemic levels.

Oil demand remains soft despite inventory surprise

Oil price jumped today as oil and gasoline inventory increased less than expected. Meanwhile, distillates inventory showed a larger-than-expected decline.

However, there is no evidence that demand for oil products is turning the corner after months of softness

From Wall Street Journal

Demand indications, that is products supplied to wholesalers, are soft, showing the eighth straight year-on-year decline for gasoline, at minus 2.3 percent in the latest week, and the first year-on-year decline for distillates, at minus 2.9 percent, since February and the steepest decline in more than one year

From the inventory chart, it is too early to infer that the bullishness in oil price will resume immediately.

Gaming Revenue of Macao Soared in April

According to Gaming  Inspection and Coordination Bureau of Macao (DICJ), casino revenue in Macau, the world's biggest gaming market, rose 44.6 percent in April to 20.5 billion patacas ($2.56 billion. $1 = 8.020 Macau Patacas). This is about 4 times the market size of Las Vegas.

Accumulated revenue for the first four months of 2011 rose 43.3 percent 79.0 billion patacas.

From Reuters, Macau's casino industry is booming on robust demand from gamblers from mainland China, which account for the bulk of the territory's visitors. The former Portuguese enclave is the only place in China where mainland Chinese can legally gamble.

Casino stocks that have exposures in Macao include LVS, MPEL, WYNN and MGM.

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.



Disclosure: The blog author does not own any of the above mentioned stocks in her personal account as of May 4, 2011.

Is Las Vegas Sell-Off a Buying Opportunity?

Shares of the casino operator (LVS) slumped as much as 6% in the morning session on May 3, 2011 as earnings and revenues disappointed, largely due to disappointing results from Marina Bay Sands. Although an EBITDA of $284.5 million  are nothing to sneeze at for a casino that is opened for only a little over a year, investors have high hopes for the gaming industry in Singapore, expecting $325 million EBITDA . Contributing to the shortfall was an unexpectedly low table hold, which is the measure of wins as a percentage of cash and markers deposited into a drop box of a gaming table and also according to the company a very conservative allocation of account receivables.

In the meantime, the company's properties in Macao including Venetian China, Sands China, the Plaza Casino and Four Season Hotel continued to deliver amazing growth in terms of both gaming and hotel revenues. The company's old base in Las Vegas continued to recover after the 2008 financial meltdown.

While Singapore might have failed to excite investors in the first quarter, it is no doubt by far the most promising gaming destination in the world. It generated an EBITDA of $1 billion in its first year of operation in 2010 even without a full-year of operation. How promising? Just think about having the entire Las Vegas strip gaming business split up between only two casinos, Marina Bay Sands and Resort World Sentosa.

In short, the price reaction of LVS after the earnings report was typical of a stock priced for perfection. The long-term prospect of LVS remains intact.  Market capitalization relative to EBITDA  is around 16, compared to 16.83 its closest US competitor, WYNN, is a tad cheaper considering its invaluable asset in Singapore.

That said, this valuation is not completely innocent. Litigation risks remain with LVS. In March 2011, the company received a subpoena from the SEC requesting documentation regarding its compliance with the Foreign Corrupt Practices Act which bars bribes to foreign officials. “Any determination that we have violated the FCPA could have a material adverse effect on our financial condition,” said the company.
Later in April, the company’s subsidiary, Sands China, was investigated by Hong Kong regulators for using inappropriate leverage against Macau government officials with the intention of accelerating the sale of apartments at its Four Seasons Hotel. It is also alleged that the company was spying on the officials with the purpose of collecting negative information to pressure the officials.

"When the smoke clears I am absolutely a thousand percent positive that there won’t be any fire below it.” That was the response given by Sheldon Adelson, the CEO of LVS. On a related note, when subpoenaed for his email, Adelson responded by saying that he does not use email. He is not an email- kind- of guy. If you ask me, that is a red flag.

You may find related articles
3 cases for LVS
Is Macao giving casinos a second wind

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.


Disclosure: The blog author does not own any of the above mentioned stocks in her personal account as of May 4, 2011.