prev

Never Bet Against Oprah

Oprah is at the forefront of a major re-launch of one of Nike’s best technologies in a decade – one that will finally get t he attention it deserves. Good for Nike. Great for FL.

 

Even though her show starts after the market closes, I do not watch Oprah. But 7.4 million (mostly female) American consumers do. Every year, thousands of products arrive at HARPO studios around the holidays for Oprah to pick her list of ‘Ultimate Favorite Things’. Last year she downplayed higher-priced items due to the recession. But this year the list is in full force. (ie, Oprah loves the iPad. Surprised? I didn’t think so…).

 

Two of the items caught our attention in particular.

 

Lululemon: The first item is a pair of Lululemon pants that offer more flexibility (in usage) that than the standard ‘Down Dawg’ and doubles as everyday ‘around town’ pants. Also, in Oprah’s words, “I’ve got to tell you, anything that cuts your but in half should be your favorite thing too.”  It’s also notable that the model wearing the pants was wearing a pair of Nike Free. That brings to the second item…

 

Nike Free is made the cut and is staging a big comeback. I mean REALLY big. This is a fairly old technology in that it came out around 6-years ago as a way for elite runners to practice running as if they were barefoot on grass. But for several reasons, Nike chose to hold off from stepping the accelerator. That was in part because Reebok and Adidas were hemorrhaging share in the US, and Nike didn’t have to do a lot to see its share go from 37% to 48% (while Adibok went from 18% down to 7%). Heck, maybe the timing was not right.

 

Now what?

  • “Toning” has become a $1bn+ category. Nike might play down this category in public. But internally, they’re livid – as any winner would be after losing a match to a seemingly lesser opponent.
  • Has anyone read ‘Born to Run?” A truly exceptional book documenting how a Mexican tribe absolutely dominates the sport of Ultra-marathoning, and no, they don’t wear Air Max 360s. They run barefoot. A great read…I’d recommend it.
  • Let’s not forget about UnderArmour’s FW product. This is the year they hit stride.

 

So all of a sudden, Nike has 2 stronger large competitors, mid-and small size competitors like New Balance and Newton running, plus some Asian imports like Anta and Li-Ning, and too top it off, they missed growth in a category that could and should own. Yeah… not good for job stability if you’re in charge of Running at Nike.

 

But does that mean that Nike will bow to the pressure and become more mainstream? No!!!

 

What you should expect is that Nike will go full force with its Free technology.  Will it be the same ol’ product as 5 years ago? Nope. They will do to the same thing to the e-reader that Apple did with iPad in the wake of Kindle/Amazon’s success. You can’t even mention Kindle and iPad in the same sentence without it sounding strange. That’s what Nike will do with Free. It will hit in spring en’ masse, and should start showing up in orders in full force by holiday. Most tools and molds are already amortized, so margins will be solid.

 

Yes, this helps Nike. But Retailers like FL should be the biggest winners.

 

Never Bet Against Oprah - banner

 

Never Bet Against Oprah - lulu

 

Never Bet Against Oprah - nke

 


Bullish Buck Breakout

POSITION: Long THE US Dollar (UUP)

 

We can be as patriotic about a position we are pushing as the next firm. After being short the US Dollar from June 7th to November 3rd, we’ve been long it since November 4th.  THE question now is can a bullish TRADE become a TREND?

 

In Hedgeye speak, a bullish immediate-term TRADE = 3 weeks or less and a bullish intermediate-term TREND extends itself to a thesis with a duration of 3 months or more. The current global short squeeze for US Dollars is 4 weeks in the making (this is the 4th consecutive week where the US Dollar Index is up on a week-over-week basis), so the question now is do we book a nice TRADE or make the case for the TREND.

 

Since US Dollars are priced relatively to other dysfunctional fiat government currencies like the Euro and the Yen, the good news for US Dollar bulls is that there’s always a case to be made for continued relative weakness in the competing currency basket. Admittedly, the European Sovereign Debt news-flow is overshooting to the bearish side at this point and we’re positioned to book part of that TRADE.

 

We covered our short position in the Euro (FXE) today as it is finally immediate term oversold. We have not, however, closed out our US Dollar (UUP) position as we continue to think that the Pain Trade is to the upside.

 

The Fundamentalist’s next question on why should be what’s your catalyst? My answer = PRICE. Yes, when immediate-term price momentum starts to morph into a potential intermediate term TREND, price can be the most important catalyst. The conclusion is that simple – you just need to get the timing right.

 

From a pain threshold perspective, one critical PRICE line to monitor from an intermediate term TREND perspective = $79.71 (see the chart below). If the US Dollar can close above and confirm what was TREND line resistance ($79.71) as newfound support, I may be knocking  at your door in Connecticut for a Thanksgiving caroling of the Canadian version of God Bless America.

 

Go US Dollar!

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bullish Buck Breakout - 5


Positive Family Footwear Trends Mirror Athletic

With the majority of family footwear retailers reporting this morning a few things are clear, boots are working - again, traffic’s improving, and comps are rivaling what we saw in the athletic channel last week. With PSS the last to report coming out next week, the read-through is unquestionably positive. Comp trajectories suggest our prior estimate of -8% comp in Q3 is simply too low at PSS. Here are our key callouts both at the channel level as well as by retailer from this morning’s calls:

 

Family Channel Callouts:

   - Consistent with what we saw in the athletic channel, EPS beats across the board with upward revisions to guidance.

   - Inventory build ahead of sales growth at all 3 companies in the channel, which better positions each to capture Q4 sales 

     strength compared to chase mode several were in last year. Also embedded in inventory growth is higher toning related

     inventory that accounts for more than 50% of inventory growth at some retailers (i.e. BWS & SCVL).

   - Comps slowing more modestly on 1yr basis in 2H reflecting a substantial acceleration in the 2yr

   - Early reads for Q4 reflect accelerating trends even from Q3 levels

   - Traffic improving (up 6% at DSW; +2.5% at SCVL, and up LSD as BWS)

   - Boot comps up +10% on a +47% last year at DSW, 40%+ at SCVL confirms trend remains robust

   - Better than expected BTS sales across the board appears to have legs into Q4

   - Promotional environment has and continues to remain more benign compared to last year

 

 

DSW: EPS of $0.79 vs. $0.75E ($0.60 last year)

Sales +10%

Inv +15%

  - Better than expected sales through first 3-weeks of Q4

  - Outlook:

  • Raised EPS to $2.30-$2.40 (was $2.20-$2.30)

  - Add’l gross margin compression expected in Q4 against significantly more difficult comps (+850bps)

  - SG&A leverage largely due to lower bonus expense compared to last year

  - Inventory per sq. ft. up 13% vs. down 11% last year so up modestly on 2yr basis

  - 2yr comp (9%+ in Q3) accelerating even higher so far in November

  • Traffic up 6% in stores (.com up 22%)
  • By category: +10% in women’s; +6% men’s; +9% athletic; +19% in accessories
  • Boots posted a +10% comp on a +47% last year

  - DSW Rewards a factor in driving sales growth with 87% of sales YTD part of program – 4mm accounts added this year

  - Now have nearly 20% of stock on replenishment system helping to increase conversion rates by 4% at the store level

  - Nike assortment expanded to include men’s running in Q3 as company broadens into more athletic

  - Toning still accounts for ~2% of total sales; unit sales consistent with 1H reflecting lower ASPs

  - Bigger focus looking forward is lightweight footwear

  - Store growth:

  • plan to open 20 new stores next year
  • 3 in smaller markets that co. has previously avoided, if successful equates to additional 50+ market opportunity
  • Seeing ‘a lot of deals’ coming up for attractive real estate opportunities – positive chg on the margin

BWS:  EPS $0.45 vs. $0.30E ($0.42 last year)

Sales +14.5%

Inv +20%

 - Better than expected BTS sales driven by athletics, dress, and casual styles

 - Less promotional activity than last year (19 fewer BOGO days)

 - Stronger initial margins in mid-tier and mass channel

 - Most significant growth at wholesale up +34% in a decade

 - E-commerce up +14%

 - Comp up +10.6% on +4.7% last year at Famous Footwear

  • Traffic up LSD and AUR with double-digit increases in conversion
  • Increases across all categories and regions
  • Women’s up HSD; Men’s up MSD; Kids & Acc’s up LDD
  • Toning accounted for +4.5% of comp (most over-indexed of family channel peers)
  • Boot and dress shoe demand drove sales at Via Spiga and Vera Wang up over 50%+

  - Sales/ sq. ft. up to $184 vs. $164 last year edging closer to goal of $200+

  - Toning accounts for ~3/4 of inventory growth in Q3 with core inventory up only +5.6% excl. toning

  - 30% of customers purchasing toning product new to FF; 1/3 of which have bought other product

  - Toning category expected to represent 6%-7% of volume in Q4.

  - Comps Q4-to-date trending up HSD

  - Wholesale backlog up +25% reflecting positive forward demand

  - Strong top-line key to offsetting $17mm after tax cost ($0.25 in EPS) related to higher incentive comp and marketing

  - Net store closings continue with 14 locations vs. opening 4 in the quarter

  - Outlook:

  • FY10 EPS to $1.00-$1.05 vs. $0.90E
  • Initial outlook for FY11 - Famous Footwear same-store sales growth in the low to mid single-digit range;

GCO: EPS $0.77 vs. $0.59E ($0.49 last year)

Sales +19%

Inv +25%

  - Comp up 9% on -2% last year

  • Up +11% through first 3-weeks of November
  • By seg: Lids +13%; Journeys +9%; Johnston & Murphy +7%; Underground Station +3%
  • Johnston & Murphy one of strongest qtrs in years driven by casual business and higher full-price selling
  • Slow start to boot sales in October – accelerating in November

  - Mix shift towards casual away from dress continues

 

SCVL: EPS $0.70 vs. $0.66E ($0.59 last year)

Sales +6.7%

Inv +12%

  - Sales trends by category and region all positive during the quarter

  - Comp up +7.2% on +10.2% last year

  • Both traffic (+2.5%) and conversion rates increased
  • Would have still been up MSD excl. toning
  • Women’s non-athletic up MSD driven by strong sandals selling at higher rates, men’s up MSD as well
  • Adult athletic up HSD driven by running up 20%+
  • Boots up double-digit in first 2-months of Q3, trended down in October, back up 40%+ in first 2-weeks of Nov.
  • Toning $$s down in Q3 though pairs remained flat sequentially

  - More than half of inventory build due to toning (up only MSD ex toning), aged levels at all-time lows

  - Still expect to ramp store openings in FY11 to 20 stores from 10 this year – mostly in existing markets

  - Outlook:

  • Q4 EPS of $0.30-$0.32 vs. $0.25E
  • Comps +4%-6%
  • Expect strength in boots to increase throughout the holiday season (Nov & Dec strongest months)
  • Also expecting continued strength in athletic and toning categories

Positive Family Footwear Trends Mirror Athletic - Comp Table 11 10

 

Positive Family Footwear Trends Mirror Athletic - Comp 1yr 11 10

 

Positive Family Footwear Trends Mirror Athletic - Comp 2yr 11 10

 

Positive Family Footwear Trends Mirror Athletic - FamFW SIGMA 11 10

 

Casey Flavin

Director


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

Voted Off the Island

Hedgeye Position: Long Germany (EWG)

 

Positions Covered today:  We covered the EUR-USD via the etf FXE for a gain following its sizable move since we shorted it on 11/4.

 

After an appropriate re-pricing of sovereign debt risk in the last week, we booked an immediate term gain on the short side of Italy (EWI). We remain bearish on Italy for the intermediate term TREND.

 

 

News out yesterday afternoon was icing on the cake in support of our conviction: don’t trust politicians, trust the markets. In a clear about-face statement from Ireland’s PM Brian Cowen late yesterday, who days before said he wasn’t going to be the scapegoat for the country’s fiscal state, he announced:

 

"It is my intention at the conclusion of the budgetary process, with the enactment of the necessary legislation in the new year, to then seek the dissolution of parliament.”

 

However, the dissolution of parliament could come far sooner than sometime next year. Here’s the political scene that’s playing out:

 

Having accepted an undefined bailout from the EU and IMF on Sunday (11/21) – projected at €80-95 Billion—Cowen and his party, Fianna Fáil, continue to wrestle against severe opposition to step down, especially as his narrow 3-seat parliamentary majority with his junior coalition partners, the Green Party, threatens to vote against him.

 

Cowen, however, continues to stress to the opposition parties of Fine Gael and Labour, as well as to defectors from his own party, that it is in the interest of the country (and markets) to first pass the scheduled 2011 budget package on December 7th, which is expected to shave €6 billion from the budget through spending cuts (~€4.5 Billion) and tax hikes of ~€1.5 Billion, to ensure a funding (bailout) agreement from the EU and IMF before a new election is called.

 

Yet standing in the way of his already paper-thin credibility, are calls from the opposition for a snap election and the uncertainty of a critical by-election vote this Thursday for one of the Green Party seats in parliament that could further turn sentiment against Cowen. The Green Party maintains support of the passage of the 2011 budget before elections are called.  However, they appear resolute in their wish to see elections held by mid-January.

 

Finally, the government is due to publish a four-year economic recovery plan on Wednesday aimed at “bringing stability to the economy”, according to Cowen. Suffice it to say, we’re expecting a lot of pin action from Ireland over the coming weeks, and the Eurozone at large.

 

Below we show the familiar charts of the 5YR Sovereign CDS and 10YR government bonds yields as a proxy for the risk trade we see developing in Europe, especially from its peripheral countries. As you can see, despite Ireland’s bailout, yields continue to rise for the PIIGS; if Greece is any example, and we think in this instance it is a good one, the risk premium to own peripheral debt should remain elevated at least over the intermediate term, which in and of itself will pose significant challenges as government still require debt servicing to meet their fiscal imbalances.

 

And today was a great example of this: Spain issued €2.09 Billion of 3-month paper at 1.743%, almost double the 0.951% commanded for a similar issue on Oct. 26th.

 

As we’ve made clear in our research, we see a long road ahead for Europe’s Sovereign debt “crisis”. Ireland is but one piece of the puzzle.

 

Matthew Hedrick

Analyst

 

Voted Off the Island - mh1

 

Voted Off the Island - mh2


GDP REVISION - UNSUSTAINABLE TRENDS

Conclusion: No change to our view that the pillars supporting the US economy are weakening. 

 

Here are some key factors to consider in the outlook for U.S. GDP growth:

  1. The boost to growth from the fiscal stimulus is fading.
  2. State and local governments will be a significant drag as they cut spending and employment. 
  3. The boost from the inventory cycle will also weaken.
  4. While exports continue to rise, imports are also increasing and the trade deficit is widening.
  5. Global growth is slowing and the sovereign debt crisis will exacerbate this weakness.

Today, the Bureau of Economic Analysis announced that the U.S. economy grew at a rate of 2.5% in the third quarter, 0.5% more than previously calculated.  The upward revision in U.S. GDP for the third quarter was due to upward revisions to consumer spending, exports, and state and local government spending.  Our view is that the trends in consumer spending and state and local spending are not sustainable.  One supporting anecdote pertaining to consumer spending is the Redbook news today that retail sales were 0.0% for November month-to-date versus October.  That compares to +0.1% month-to-date reported in the week prior.

 

In 2011, GDP growth will be increasingly dependent on the internal demand drivers: consumer spending and the corporate sector driving investment.  While corporate profits have returned to their pre-recession levels, confidence needs to improve.  The hoarding of cash by Corporate America underlines their reluctance to hire and invest in long-term fixed assets.  The political volatility in Washington, and the lack of predictability that goes with it, has been cited by several major CEO’s as a cause for concern. 

 

The most significant downside risk is the continued weakness in the labor market, which is needed to sustain continued improvement in consumer fundamentals.  Under an optimistic scenario, 1-2% GDP growth will prove to be inadequate in an effort to reduce the unemployment rate.  Add to this slowing global growth and the European sovereign debt crisis and it seems that we are far from seeing a significant acceleration in GDP.  Downside risk for the economy is still alive and well.

 

Howard Penney

Managing Director

 

GDP REVISION - UNSUSTAINABLE TRENDS - contribution to 3Q gdp


The Korea Boy King Rattles His Saber . . . Does It Matter?

Conclusion: While North Korea’s actions shouldn’t be taken lightly, the nation’s wherwithal to actually accelerate military activity is limited and this appears to be another attempt to get the nation noticed and make themselves relevant.  We’ve posted a replay of our May call below.

 

Overnight North Korea fired artillery shells at a South Korean island near their border, killing two soldiers and setting houses on fire. South Korea responded by firing 80 rounds at its Northern neighbor, in addition to dispatching F-16 fighter jets to the area and raising the military alert to its highest level. Tensions on the peninsula haven’t been this high since North Korea sank the South Korean warship Cheonan back in March – an attack that killed 46 sailors. Unlike the March attack, however, this attack was on a civilian-occupied island and could be considered the most serious provocation in at least two decades.

 

Back in May, when the struggle was expected by many pundits to escalate into a full-blown war, we hosted a conference call with our subscribers with renowned Yale Historian Charles Hill. On the call, Professor Hill discussed in great detail the likelihood of an outbreak of war on the peninsula, while masterfully weaving in the history of the relationship and his first-rate knowledge of North Korean leaders and psychology to deliver an actionable roadmap for navigating this geopolitical risk.

 

Some key takeaways were:

  • North Korea’s leadership and military is more divided than most pundits believe;
  • North Korea has a history of creating skirmishes to get attention/get what it wants via negotiations, be it food, humanitarian aid, etc.; and
  • North Korea’s ailing economy forces its administration to use its sovereign powers to run a large-scale “criminal organization”.

For a replay of the call, please copy and paste the following link into the URL of your browser:

https://www.hedgeye.com/promos/podcasts/36697-3-8059-Korean_Risk_and_Global_Markets__with_Professor_Hill

 

Yours in risk management,

 

The Hedgeye Macro Team

 


GET THE HEDGEYE MARKET BRIEF FREE

Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

next