Trader Talk

Consumers Still Under A Lot of Pressure


The U.K.'s FTSE index spiked to its highest level since October when the Bank of England unexpectedly announced they were expanding the size of their bond purchases, by 50 billion Pounds, to 175 billion pounds.

The BOE's policy of quantitative easing was widely viewed as successful, and most thought that it would be unnecessary for the central bank to keep buying bonds to keep rates low.

But the BOE is buying itself some insurance by saying that while both capital markets and economic conditions have shown signs of stabilization, conditions are still fragile.

The European Central Bank (ECB) left rates unchanged.


1) July retail sales very mixed. Ken Perkins at RetailMetrics notes that 61 percent of retailers missed expectations, 35 percent beat, 4 percent matched. On average, 45 percent miss, 53 percent beat, 2 percent match.

Winners: Kohls,Chico's did positive comps; Nordstrom was better than expected.

Macy's ,Aeropostale and Gap guided higher.; TJX guided to the high end of its guidance range.

JC Penney reported a sales drop of 12.3 percent, in line with expectations, but raised earnings guidance; now seeing a loss of $0.01, had previously seen a loss of $0.08-$0.12.

Despite a smattering of good news, bear in mind there are a lot of companies reporting double-digit declines: Abercrombie (-28.0 percent), American Eagle ( -11.0 percent), Saks ( -16.3 percent), Dillard's (-12.0 percent),

Bottom line on retail:

a) this is still a margin growth story on cost cutting and inventory reduction, as opposed to a revenue growth story.

b) demand remains poor, but inventory levels are getting leaner, so the game is restocking.

c) the consumer remains under a lot of pressure; the hope is that we will see some back to school lift, but Labor Day is the latest possible date this year. There are a lot of tax-free holidays in August, particularly in the South, that may help.

d) cash for clunkers is a problem for retailers: a big competitor for discretionary purchases like retail. People now making a $400 a month car payment will have less money for retail.

2) Shares of Brinker drop 11 percent pre-open. The operator of Chili's, Maggiano's and On the Border beat Q4 earnings estimates ($0.52 vs. $0.49) largely on cost cuts, which helped offset a 9 percent decline in same-store sales.

Group of Securities

Weighing significantly on shares this morning - the company's bleak outlook. Q1 and FY 2010 earnings are forecasted to fall below analyst estimates. Also discouraging: sales will continue to fall, as same-store sales are expected to decline 2 to 4 percent in the new fiscal year.

3) Wendy's Arby's Group earnings inline with estimates. At its Wendy's restaurants, same-store sales fell 0.4 percent, and margins improved significantly to 15.9 percent from 12.2 percent on higher pricing and reduced costs.

The company's Arby's chained struggled, however, with same-store sales falling 6.9 percent and a 1 percentage point reduction in margins from "aggressive discounting in the sandwich category."

4) Morgan Stanley up 2 percent after announcing an agreement to buy back warrants from the government for $950 million.The warrants were originally issued to government as part of the $10 billion TARP investment the Treasury made in the financial service firm.

3) I want my stimulus: great time to be in the construction business in China. While IPOs are still pretty meager here, China's IPO market is on fire. Overnight, BBMG, one of the largest building materials manufacturers in China, went public in a $760 m IPO, and closed up 65 percent.

This follows on the heels of the biggest IPO in the world to date, China State Construction Engineering Corp, which went public last week in China in a hugely successful $7.3 billion IPO.

Sichuan Expressway (sounds like a Speed Racer sequel) also floated a big IPO last week.



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